Many small business owners miss out on tax savings simply because they aren’t aware of what tax deductions are available. As professional accountants, we know all the small business tax deductions that can save you money, and we’re sharing them in this tax deductions checklist.
Before we get into the nitty-gritty of what you can count as a tax deduction, let’s define what a tax deduction is and isn’t.
What is a tax deduction?
You may also hear people refer to tax deductions as tax write-offs. Put simply, it’s an expense that you can deduct or subtract from your total taxable income.
The benefit of tax deductions is that as you lower your total taxable income, you could lower the percent you pay. There are different tax deductions for small businesses and individuals. For this, we are focused on small business tax deductions.
The actual amount that you’ll pay in taxes depends on many factors like your tax bracket (how much taxable income you have), where you operate your business, and what type of business you have (C-corp, sole proprietorship, LLC, partnership, or S-corp). The IRS Publication 535 has about 60 pages of details related to business expenses, tax deductions, tax credits, and more, so it can be confusing for new companies.
Tax Deduction vs Tax Credit
A tax deduction and tax credit can both save you money on taxes, but they are different terms.
Tax deductions can lower the amount of taxable income. For example, tax brackets–a range of annual income–are used for income tax. If your income falls within a lower range, the percent of income taxed may be lower.
Tax credits are set amounts that are subtracted from your total taxes owed. If you qualify for a business tax credit, the amount of that credit is subtracted directly from the amount of taxes you pay.
- Tax credit – If your business owes $40,000 in taxes and you qualify for a $10,000 tax credit, you’d owe $30,000.
Now that we have a clear understanding of what counts as a tax deduction vs tax credit, let’s dive into the specifics, so you can start saving some money on taxes.
Top Small Business Tax Deductions Checklist
To figure out if you qualify for a small business tax deduction, first identify what business expenses you have. Most business expenses are tax-deductible, but it can be tricky to track and separate them from personal expenses.
This small business tax deductions checklist will help you do just that. You can click on each section below to go directly to that tax deduction. Some of the common small business tax deductions are:
- Home office
- Office supplies
- Rent expenses
- Business insurance
- Bank fees
- Interest
- Car expenses
- Travel expenses
- Phone expenses
- Employee wages
- Employee benefits
- Education and training
- Business meal expenses
- Advertising and marketing
- Legal, accounting, and professional fees
- Conventions and trade shows
- Gifts
- Charitable deductions
- Equipment and depreciation
- Repair and maintenance
Let’s take a look at each of these small business tax deductions in-depth.
Home office
Many people have questions regarding a home office deduction. So many people have been working from home since the Covid-19 pandemic, but only those who meet the home office guidelines can include this expense in their small business tax deductions.
If you use part of your home as an office and you run a self-employed, partnership, or other business, you may qualify. However, your home office needs to meet certain criteria. If it fits any of these descriptions, you likely qualify for a home office deduction.
- Your home office is your primary place of business. If you designate a physical store or other location as your office, then you wouldn’t qualify.
- It is where you conduct business, meet regularly with clients, and complete orders.
- It is a separate structure (like a guest house or studio) that is not connected to your place of residence.
If you do qualify, you can deduct office expenses like utilities, mortgage payments, and even repairs. You can do this by using one of two methods–simplified or regular deductions.
SIMPLIFIED DEDUCTIONS
If you use the simplified option for claiming tax deductions, the IRS permits you to deduct $5 per square foot of office space. However, you’ll be capped at a maximum of 300 square feet, which often prevents you from claiming garage space as a work area.
REGULAR DEDUCTIONS
Using the regular method, you’ll need to determine the square footage of your home office and express this area as a percentage of your home’s total square footage. You can then apply this percentage to all home expenses.
For example, if your home office represents 10% of your home’s total square footage, you can deduct 10% of expenses which include:
- Rent or mortgage interest
- Property taxes
- Utilities
- Homeowner’s insurance
- Homeowner’s association (HOA) fees
- Cleaning services
Can you deduct the cost of your home’s Internet? Yes. Like your other utilities, you’ll simply deduct a percentage of the cost of the Internet service for the year, including monthly fees, equipment, and installation.
Just be aware that the IRS keeps a fairly close eye on these types of deductions. It never hurts to snap a few photos to document your workspace to demonstrate it’s used for business.
Office supplies
There are many things to buy for an office, from purchasing all new supplies to ordering more printer paper throughout the year. These are some typical tax-deductible office supplies.
- Paper
- Pens, highlighters, and pencils
- Toilet paper
- Business cards
- Furniture
- Mailing supplies
- Cleaning supplies
- Staplers
- Breakroom appliances
- Drinks for employees
Mailing supplies may not fit into the office supplies category. If your small business sells homemade crafts and buys mailing envelopes to mail those crafts, that falls into a separate category for the cost of goods sold. Sending letters to customers or mailing a check to pay rent would be considered office supplies for small business tax deductions.
Rent expenses
For many small business owners, rent is a rather large expense that can be deducted from your taxable income. However, you can only subtract business rent expenses, not personal living expenses.
If you have a physical store or business that you pay rent for, it qualifies for a tax deduction. The exception to this is rent paid for a residential dwelling out of which you work. Even if you have a home office, you can’t deduct your home’s rental expenses from your taxes.
Business insurance
Premiums for business insurance are a sizable overhead cost, but luckily, many qualify as a tax deduction. These business insurance costs are tax-deductible:
- General liability insurance
- Professional liability insurance
- Commercial property insurance
- Workers’ compensation insurance
- Data breach insurance
Typically, these policy types are regarded as common and necessary for the operation of your business, so you can deduct 100% of the full amount of your monthly premiums, as well as any additional fees required for maintaining the policy.
You may have other insurance policies that are unique to your niche. If you’re unsure, it’s a good idea to contact a tax accountant to verify whether or not they count as a tax deduction.
Bank fees
Small businesses should have separate bank accounts and credit cards that are solely for company use. This keeps personal and business expenses separate.
Since you’ll be relying on a business bank account, bank fees can be counted among your business expenses, though only those that relate to normal business operations. Monthly fees, for example, can be deducted, but overdraft penalties cannot.
Many small businesses use Paypal, Square, or other services to take credit or debit card payments. These services typically charge service fees. These fees from financial institutions can also be claimed as tax deductions.
Interest
If you have a small business loan, credit card, or investor funding, you likely pay interest on it throughout the year. Interest paid on loans and other finances are tax deductions.
You can deduct the amount of interest paid on:
- Business loans
- Business credit cards
- Mortgage loans to buy or improve your home or business property
- Home equity loans
- Money borrowed for investment (if the investment has more interest than income, you can carry forward the overage to next year)
Keep in mind that this doesn’t include gifts or loans that are through family members. It is hard to verify the interest paid on loans that aren’t through qualified lenders.
Car expenses
Traveling for business is common for many company owners as they meet with clients and pick up supplies. When a personal vehicle is used for business purposes, this use can be deducted based on a standard mileage rate or actual expenses.
- For the 2021 tax year, the standard mileage rate deduction is .56 cents per mile. If you drove your car 100 miles strictly for business-related activities, you could deduct $56 from your taxable income. For 2022, the mileage rate is .585 cents per mile. For 100 miles, you could deduct $58.5.
Mileage rate deductions allow business owners to track how many miles they have driven for business purposes and multiply that by the average mileage deduction rate for that year.
An actual expense method accounts for all costs related to car expenses. It requires receipts of gas and all vehicle costs–including repairs, insurance, fuel, and registration payments–to be supplied and multiplied by the number of miles driven. To decide which method to use, choose the one that gives you the greatest deduction. Most business owners go with the standard mileage rate.
Travel expenses
Outside of vehicle expenses, there are travel-related expenses that may be tax write-offs. To qualify as a travel expense, it has to be necessary business travel, not travel for entertainment. In general, businesses are no longer able to deduct entertainment expenses for taxes.
If you reimburse employees for travel, you can count that as a tax deduction. For the most part, travel deductions are expenses that you incur while you’re traveling away from your tax home (where you usually pay taxes).
For instance, If you need to travel across the country to meet with suppliers, then you can deduct those expenses.
Other travel tax deductions include:
- Business meals and lodging
- Travel fares for planes, trains, buses, or other transportation
- Dry cleaning and laundry services
- Parking fees
- Cab rides
Any travel performed in the operation of your business can be deducted from your taxes. In most cases, conference tickets can also be claimed as a business expense, provided that the conference is related to your company. You can find a full list of tax-deductible travel expenses from the IRS here.
Phone expenses
If you have a cell phone devoted to your business, you can deduct the cost of your plan. This would include the monthly fee, the cost of the phone itself, and any other charges associated with setup and activation.
If you rely on your personal cell phone, you’ll have to deduct the cost of the portion of the bill devoted to business use. This can be tricky since your cell phone is likely used for more than just phone calls, but you can make a reasonable estimate by examining data usage and time spent using the phone.
Employee wages
Salaries, including commission and bonuses, are fully tax-deductible. You can subtract the full amount.
The exception to this is if your business is a sole proprietorship, LLC, or partnership, and you do not have employees other than yourself. Because you aren’t considered an employee, you wouldn’t deduct your income as an employee wage.
If you have family members that work in your small business, there are some additional tax considerations.
Family members who legally work for your business and are under 18, may be exempt from paying FICA, also referred to as federal payroll tax. If a family member is under 21, you may not need to pay FUTA or federal unemployment tax for them.
Employee benefits
Although employee benefits can be costly for employers, they improve the quality of the workplace and increase staff morale. Health insurance is quite expensive for employers, but it greatly benefits employees. Under certain guidelines, it may be tax-deductible.
Other employee benefits include paid time off, vacation time, retirement, and life insurance.
Education and training
Many businesses require employee training for OSHA safety, insurance license exams, and other certifications. Plus, many employees today see personal development and education budgets as a job benefit.
Paying for employees’ training and education is not only a good incentive for workers to continue working for the business, but it also helps decrease your taxable income.
You can write off 100% of the costs associated with training that is directly related to your business knowledge and expertise. Business education tax deductions include
- Classes, seminars, webinars, and workshops
- Business books
- Subscriptions to trade publications
- Transportation expenses to and from the education venue
Business meal expenses
Wining and dining clients is a common practice. As is, showing appreciation to your employees by providing food and beverages.
You can often deduct 50% of meal costs from your business taxes, but these dining experiences must follow specific guidelines. They must be necessary and not outside of typical business arrangements. You can also deduct meals with clients, but only when they happen during business meetings.
If you and a client decide to see a movie or sporting event, these entertainment costs will not count among your normal and necessary business expenses. Therefore, there is no deduction for them.
Here are some examples of business meal expense deductions.
- The amount spent on food for recreational business activities like holiday gatherings or pizza parties.
- Providing food delivery for remote employees for a virtual event.
- Meals that are purchased while an employee is traveling for business.
As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the IRS temporarily allowed for 100% meal-related tax deductions. This will end in 2023.
Business meal expense deductions can save you a lot of money on taxes, but it’s important to know what qualifies and what doesn’t. If you aren’t sure, a professional accountant can help you get the proper amount to write off, but you should keep track of all receipts for food expenses.
Advertising and marketing
Many business owners set aside a large budgeted amount each year for marketing expenses. Marketing and advertising are a huge part of getting the word out about your business–and they are a tax deduction.
All expenses associated with marketing and promoting your business are tax-deductible. This includes:
- Social media campaigns
- Local newspaper ads
- Radio or television spots
- Digital marketing
There are also some less well-known marketing tax deductions to consider like:
DESIGN OR CONTENT CREATION CONTRACTORS
If you hire a designer or copywriter contractor–not an employee–to produce content for your business, you can deduct their wages, just as you would any other 1099 worker.
MARKETING SOFTWARE AND TOOLS
You can also deduct marketing tools that you use to run email campaigns or manage your social media calendar. If you use subscription-based services, like Mailchimp or Hubspot, the cost of your annual subscriptions also counts toward tax deductions.
PROMOTIONAL PRODUCTS
T-shirts, pens, or promotional products that have your company name or logo on them are considered advertisements. These swag products are tax deductions as well as great tools for marketing.
For many business owners, these write-offs are an encouragement to invest in marketing. You’ll gain more exposure for your business while finding yourself in a more favorable position during tax season.
Legal, accounting, and professional fees
Many small businesses don’t realize that they can deduct costs to hire lawyers and accountants. Because legal and accounting are necessary expenses to operate a business, they count as tax write-offs.
This small business tax deduction covers any consultants you hire for running your business, including attorneys, accountants, tax preparers, and advertising agencies.
However, the tasks that these professionals conduct must be strictly for your company. Personal legal and accounting fees like estate planning are not tax-deductible.
Conventions and trade shows
For many artists and home-based small businesses, trade shows and conventions are necessary to obtain customers and sales. These shows can get expensive when you’re paying for hotels, meals, booth fees, and other related expenses.
You can deduct these expenses from business taxes so long as they are necessary. Many of the common things businesses pay for at these shows include:
- Registration fees
- Supplies
- Travel expenses
- Hotels away from home
- Marketing expenses
While these expenses add up, they can be substantial small business tax deductions.
Gifts
If you gift employees or customers gifts, you may be able to deduct the cost. However, compared to other expenses, it is a pretty low amount. According to the IRS guidelines, there is a limit of $25 per tax year for gifts.
Charitable business deductions
For many businesses, charity work is a great way to give back to the community that they work hard to serve. Companies donate to charities in the form of physical goods or monetary donations. So long as these are given to qualifying charities, you can deduct these contributions.
Keep receipts for any goods purchased for the charity as well as for cash donations. If the gift is over $250, you’ll want to get a receipt or acknowledgment from the organization.
In addition to goods, you can deduct costs associated with volunteering. According to the IRS, travel and other out-of-pocket expenses not reimbursed by the charity are eligible for a deduction. Expenses include flights, gas, hotels away from home, and meals.
Equipment and depreciation
Equipment deductions apply to any machinery, computers, or other items necessary to perform a business. These items will often depreciate with time, so you may be able to count a depreciation deduction.
For a small business that creates custom T-shirts, equipment might include a heat press or a vinyl cutter. For a woodworking shop, equipment might consist of drills, a saw, and a nail gun.
Equipment should not be confused with supplies, including T-shirts for the first company or nails, screws, and wood glue for the second company.
Repair and maintenance
You will eventually need to get equipment repaired or routinely serviced. This can be a tax deduction, but it is considered separate from an equipment purchase. For instance, whenever you require something like a computer repair, this would fall under the equipment repair category.
Businesses that use large, heavy machinery that is prone to breaking down can use this deduction to deduct costs associated with repair and maintenance. Also, real estate owners may be able to deduct non-equipment repair costs for routine maintenance items like painting a building. Be careful to check before investing money into particular projects, because there are strict guidelines around what qualifies as repair or maintenance.
Preparing taxes comes with many questions for those who don’t do it daily. It can lead to an immense amount of time browsing the IRS website to answer questions that a professional can answer in minutes.
Tax season can be a stressful time for many businesses. There are so many deductions to consider. Preparing taxes comes with many questions for those who don’t do it daily. It can lead to an immense amount of time browsing the IRS website to answer questions that a professional can answer in minutes.
When questions arise concerning state and federal taxes or possible deductions, it helps to have a tax prep professional ready to answer any questions. Our staff is certified by the IRS to perform tax preparation. Finding answers to questions regarding qualifications for small business tax deductions is simple.
